Can Rates Hold Under 5%?
Posted 08-03-2009 at 08:58 AM by VictorBurek
Mortgage rates moved again under 5% late last week following a successful auction of 7 year notes on Thursday and weaker than expected economic data on Friday. In what has become a consistent pattern lately, each time rates break the 5% barrier they do not remain there very long. So far this morning, things are shaping up to continue that trend. Last night, the Eurozone and China reported that manufacturing came in better than expected posting nice gains. This positive news for economic growth in Europe and China has sparked a global rally in stocks which has applied pressure on mortgage backed securities and treasuries to move lower in price. To remind readers, when MBS and treasuries move lower in price the yields(interest rates) move higher. Also contributing to the equity optimism was positive words from ex Federal Reserve Chairman Alan Greenspan who gave an optimistic view on economic recovery.
We do have some economic data this morning which will dictate the flow of investor money for the rest of the day. First out this morning is the Institute of Supply Management’s Manufacturing index which measures the strength of manufacturing by surveying more than 300 manufacturers across the U.S. Each of the last four readings of this survey has indicated an easing of the current recession which is helping to spark the green shoots theory of a quick economic recovery. This sentiment has helped the stock market to move considerably higher over the last couple months. The report has indicated that manufacturing continues to improve coming in at 48.9 beating estimates of 46.5. This better than expected data will provide further support to the green shoots theory and will continue to pressure MBS to move lower.
Also out this morning is the monthly Construction Spending report which shows the month over month change to the dollar value of new construction activity on residential, non-residential and public projects. Last month’s report showed construction spending declining 0.9% after gaining 0.6% in April. Expectations for June was further weakness with a decline of 0.5%. An increasing trend on construction spending would lead to more construction jobs and increased spending, both positive news for economic growth. When a home or office is built there are many things that must be purchased to complete the project. So, when construction spending is increasing, we usually see the stock market rally. The actual report has indicated that construction spending increased last month by 0.3% beating estimates of further declines. This report will also pressure MBS to move lower.
Here is a recap of the week ahead:
Tuesday
- Personal Income and Outlays which tracks the month over month change in consumer income and consumer spending. Last month Personal income posted a huge gain of 1.4% following a 0.7% rise in May. The big increase in income was offset by the news that much of the advance was attributed to one time payments under the American Recovery and Reinvestment Act of 2009. Expectations for this month’s report is for personal income to post a 1.1% decline. Consumer spending is expected to post a 0.3% increase matching last month’s numbers. As part of this report we get the Federal Reserve’s favorite gauge on inflation with the Personal Consumption Expenditure. The PCE tracks the monthly change in consumer prices. Expectations call for a month over month increase of 0.2% following last month’s tame 0.1% rise. MBS tend to benefit when income, spending and PCE come in lower than expected.
- At 10am eastern, The National Association of Realtors will release their pending home sales index which tracks the monthly change in pending home sales. A pending home sale is one in which a contract has been placed on a home but the loan has not closed.
Wednesday
- Mortgage Bankers’ Association weekly applications index which tracks the month over month increase/decrease in applications at mortgage lenders. An increasing trend in applications suggests that the housing market conditions are improving which many economists feel is needed before our overall economy can start to grow.
- The ADP Private Employment report which measures the number of jobs that were lost or created in the prior month. This report is conducted by a private payroll company is not considered to be highly accurate but it has shown signs of improving. This report is released the same week as the official government numbers which we get on Friday.
- Factory Orders which represents the dollar value of new orders for both durable and non durable goods. An increasing trend in factory orders indicates that factories will be busier which should lead to higher corporate profits. Since MBS prefer more moderate growth which leads to lower inflation, they tend to benefit with a lower than expected reading. Economists surveyed expect this report to show factory orders declining 0.9% after last month’s 1.2% increase.
- Institute of Supply Management Non Manufacturing Index which is similar to the ISM index we get today but is a survey of non manufacturing firms and indicates the strength of other economic sectors such as mining, construction, agriculture, etc… Economists surveyed are expecting a reading of 48.2 following last month’s better than expected 47.0.
- The biggest news item of the day will be the announcement from the U.S. Department of Treasury of the size of next week’s auction of 3 year and 10 year notes and 30 year bonds. The added supply of debt on the market will apply pressure on the fixed income sector to move lower in price, higher in yield to allow for the added supply and to attract buyers.
Thursday
- Weekly jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. This is one report which has yet to show much signs of improvement with economists’ expectations of 575,000 claims last week following the prior week’s 584,000. MBS tend to benefit with higher unemployment numbers.
Friday
- The Employment Situation Report which is the single most important economic data set on a monthly basis. This report informs market participants of four major aspects of employment. First is the number of jobs lost or created in the prior month. Expectations call for a loss of 300,000 following the prior month’s 467,000 loss. We also get the official unemployment number which is expected to post an increase to 9.7% from 9.5%. MBS would tend to benefit with more job losses and a higher unemployment number. The third part of this report is a measure on income with the average hourly earnings expected to post a 0.1% increase following last month’s flat reading of 0.0%. Lastly is the number of hours worked which is expected to post an increase to 33.1 from 33.0. MBS tend to benefit when hourly earnings and work hours are less than expected due to less income to the consumer. If the consumer is making less per hour and working less hours, they will have less income available to spend in the economy.
Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 4.875% to 5.125% range for the best qualified consumers. Early weakness with MBS might result in lenders reissuing new rate sheets as the better than expected economic data today is helping the stock market to move higher by over 100 points. The strength in equities is resulting in market participants selling their low yielding safe fixed income investments if favor or more risky stocks which could generate greater returns. Already this morning, MBS have lost most of the gains they enjoyed on Friday.
We alerted readers on Friday to take advantage of the improved rate sheets and lock your loans. If you did, good for you and well played. If you still floating, you might want to contact your mortgage professional this morning and get your rate locked. It appears the recent trend of rates being below 5% for a brief time is going to continue. There are still some lenders offering sub 5% rates, take advantage before they disappear.
We do have some economic data this morning which will dictate the flow of investor money for the rest of the day. First out this morning is the Institute of Supply Management’s Manufacturing index which measures the strength of manufacturing by surveying more than 300 manufacturers across the U.S. Each of the last four readings of this survey has indicated an easing of the current recession which is helping to spark the green shoots theory of a quick economic recovery. This sentiment has helped the stock market to move considerably higher over the last couple months. The report has indicated that manufacturing continues to improve coming in at 48.9 beating estimates of 46.5. This better than expected data will provide further support to the green shoots theory and will continue to pressure MBS to move lower.
Also out this morning is the monthly Construction Spending report which shows the month over month change to the dollar value of new construction activity on residential, non-residential and public projects. Last month’s report showed construction spending declining 0.9% after gaining 0.6% in April. Expectations for June was further weakness with a decline of 0.5%. An increasing trend on construction spending would lead to more construction jobs and increased spending, both positive news for economic growth. When a home or office is built there are many things that must be purchased to complete the project. So, when construction spending is increasing, we usually see the stock market rally. The actual report has indicated that construction spending increased last month by 0.3% beating estimates of further declines. This report will also pressure MBS to move lower.
Here is a recap of the week ahead:
Tuesday
- Personal Income and Outlays which tracks the month over month change in consumer income and consumer spending. Last month Personal income posted a huge gain of 1.4% following a 0.7% rise in May. The big increase in income was offset by the news that much of the advance was attributed to one time payments under the American Recovery and Reinvestment Act of 2009. Expectations for this month’s report is for personal income to post a 1.1% decline. Consumer spending is expected to post a 0.3% increase matching last month’s numbers. As part of this report we get the Federal Reserve’s favorite gauge on inflation with the Personal Consumption Expenditure. The PCE tracks the monthly change in consumer prices. Expectations call for a month over month increase of 0.2% following last month’s tame 0.1% rise. MBS tend to benefit when income, spending and PCE come in lower than expected.
- At 10am eastern, The National Association of Realtors will release their pending home sales index which tracks the monthly change in pending home sales. A pending home sale is one in which a contract has been placed on a home but the loan has not closed.
Wednesday
- Mortgage Bankers’ Association weekly applications index which tracks the month over month increase/decrease in applications at mortgage lenders. An increasing trend in applications suggests that the housing market conditions are improving which many economists feel is needed before our overall economy can start to grow.
- The ADP Private Employment report which measures the number of jobs that were lost or created in the prior month. This report is conducted by a private payroll company is not considered to be highly accurate but it has shown signs of improving. This report is released the same week as the official government numbers which we get on Friday.
- Factory Orders which represents the dollar value of new orders for both durable and non durable goods. An increasing trend in factory orders indicates that factories will be busier which should lead to higher corporate profits. Since MBS prefer more moderate growth which leads to lower inflation, they tend to benefit with a lower than expected reading. Economists surveyed expect this report to show factory orders declining 0.9% after last month’s 1.2% increase.
- Institute of Supply Management Non Manufacturing Index which is similar to the ISM index we get today but is a survey of non manufacturing firms and indicates the strength of other economic sectors such as mining, construction, agriculture, etc… Economists surveyed are expecting a reading of 48.2 following last month’s better than expected 47.0.
- The biggest news item of the day will be the announcement from the U.S. Department of Treasury of the size of next week’s auction of 3 year and 10 year notes and 30 year bonds. The added supply of debt on the market will apply pressure on the fixed income sector to move lower in price, higher in yield to allow for the added supply and to attract buyers.
Thursday
- Weekly jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. This is one report which has yet to show much signs of improvement with economists’ expectations of 575,000 claims last week following the prior week’s 584,000. MBS tend to benefit with higher unemployment numbers.
Friday
- The Employment Situation Report which is the single most important economic data set on a monthly basis. This report informs market participants of four major aspects of employment. First is the number of jobs lost or created in the prior month. Expectations call for a loss of 300,000 following the prior month’s 467,000 loss. We also get the official unemployment number which is expected to post an increase to 9.7% from 9.5%. MBS would tend to benefit with more job losses and a higher unemployment number. The third part of this report is a measure on income with the average hourly earnings expected to post a 0.1% increase following last month’s flat reading of 0.0%. Lastly is the number of hours worked which is expected to post an increase to 33.1 from 33.0. MBS tend to benefit when hourly earnings and work hours are less than expected due to less income to the consumer. If the consumer is making less per hour and working less hours, they will have less income available to spend in the economy.
Early reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage is in the 4.875% to 5.125% range for the best qualified consumers. Early weakness with MBS might result in lenders reissuing new rate sheets as the better than expected economic data today is helping the stock market to move higher by over 100 points. The strength in equities is resulting in market participants selling their low yielding safe fixed income investments if favor or more risky stocks which could generate greater returns. Already this morning, MBS have lost most of the gains they enjoyed on Friday.
We alerted readers on Friday to take advantage of the improved rate sheets and lock your loans. If you did, good for you and well played. If you still floating, you might want to contact your mortgage professional this morning and get your rate locked. It appears the recent trend of rates being below 5% for a brief time is going to continue. There are still some lenders offering sub 5% rates, take advantage before they disappear.
Total Comments 0
